Prospects for Orchard Road malls may be better than suburban ones

SUPPLY chain disruptions are driving up inflation, and prospects for the global economy have worsened in recent months. Rising mortgage rates could erode the buying power of consumers.

However, Singapore’s reopening and moving to live with Covid have thus far supported the recovery of malls here. Frasers Centrepoint Trust , which mainly owns suburban malls here, posted positive rental reversion for its retail portfolio for the financial year ended Sep 30, with tenants’ sales up 11.3 per cent from a year ago.

CapitaLand Integrated Commercial Trust reported that tenants’ sales per square foot at its malls rose 21.3 per cent year on year for the first nine months of 2022, with tenants’ sales at downtown and suburban malls up 36.5 per cent and 10.7 per cent respectively. 

Orchard Road is now transformed into a Christmas wonderland with glistening light displays, immersive attractions, musical entertainment and pop-up events. Beneath the dazzling lights, are prospects for Orchard Road malls, which have generally been underperforming, looking up?

Orchard Road retail underperforms

Between Q4 2019 and Q3 2022, the median rent based on contract date for retail space in the Orchard Planning Area fell by 19.9 per cent, while the vacancy rate rose from 8 per cent to 10.8 per cent, according to the Urban Redevelopment Authority. Over the same period, retail space in Outside Central Area fared better – median rent based on contract date fell 12.3 per cent while vacancy rate improved from 7.1 per cent to 6.1 per cent. 

The valuation of Ion Orchard slipped 1.6 per cent between end-2017 and end-2021. Over the same period, the valuation of suburban malls Junction 8 and Tampines Mall rose by 8.3 per cent and 3.2 per cent respectively.

While suburban malls sitting within big public housing estates can serve a ready catchment of residents living in the immediate vicinity, Orchard Road malls may not benefit from serving a large residential population living nearby.

Underperformance into outperformance

However, Orchard Road malls are experiencing better performance. For the 12 months ended August, tenant sales at SPH Reit’s Paragon in Orchard Road rose 25.6 per cent year on year versus an 8.8 per cent rise for the suburban Clementi Mall. In the future, several trends may buoy Orchard Road malls and lead to them outperforming suburban ones.

Firstly, Singapore has higher international visitor arrivals, with this trend likely to continue. International visitor arrivals rose for the ninth straight month in October to set another monthly record since the start of the pandemic, according to the Singapore Tourism Board. There were 816,758 arrivals in October versus 782,076 in September.

The rise in leisure and business travellers to Singapore can help Orchard Road malls, as some visitors stay at the many hotels located in the area. Visitors not staying in Orchard Road hotels may patronise the area for its range of retail and dining offerings.

Secondly, amid geopolitical tensions, Singapore’s premium as a safe haven status destination is rising. Many of the ultra-rich, particularly from Asia, are choosing to have a presence here. Some of the ultra-rich may spend time in super luxury condominiums in the Orchard Road area, or open a family office here, or secure permanent residency status here. As more very wealthy people stay longer in Singapore, demand is generated for luxury cars and yachts, as well as high-end restaurants and boutiques.   

Orchard Road hosts many luxury retailers. Expect more purveyors of luxury offerings to open at places such as The Shoppes at Marina Bay Sands and Orchard Road to cater to the ultra-rich. New brands have opened up shop while existing brands have revamped their offerings throughout 2022 at The Shoppes, which focuses on luxury retail, particularly in the watch and jewellery category.

Thirdly, even though consumers here spent more money as Singapore opened up this year, they may tighten their belts in 2023 if economic prospects worsen. The rise in the goods and services tax – from 7 per cent to 8 per cent from 2023 and 9 per cent from 2024 – could hurt consumer sentiment.

Many high-end retailers, which have a large presence in Orchard Road, may be better able to cope with high inflation and weak economic growth than other retailers. High-end retailers can often raise prices of goods without risking a major drop in demand. Wealthy customers may not curb their spending as much as mass market customers amid economic weakness.

Luxury products group LVMH Moet Hennessy Louis Vuitton’s revenue grew for the first nine months of 2022, up 28 per cent year on year. Organic revenue growth was 20 per cent, with double-digit growth for key categories such as fashion and leather goods, perfumes and cosmetics, as well as watches and jewellery. The group posted strong growth in Europe, the US and Japan, driven by solid demand from local customers and the recovery in international travel. 

Fourthly, new facilities are coming up in the Orchard Road belt that will enhance the precinct’s attractiveness. A new action sports facility called Trifecta will open by next year in the Somerset area. Visitors can skate, surf, ski and snowboard at the new attraction. 

Pacific Eagle Real Estate will build an iconic development at strata-held Tanglin Shopping Centre, which it bought for S$868 million in an en bloc sale earlier this year. Freehold commercial site Ming Arcade, which is located nearby, has been recently put up for sale, with an expected price of over S$140 million. The public tender is slated to close on Dec 15. 

Singtel is working with Lendlease to redevelop its Comcentre headquarters in the Orchard Road vicinity. The new development is expected to have a total gross floor area of over 110,000 square metres, comprising Grade A office buildings, a retail component and Singtel’s telecom infrastructure. 

Against a fairly supportive backdrop, building attributes and asset management could drive vastly differentiated performance among Orchard Road malls. While Orchard Road landlords can reap rich rewards by serving wealthy patrons, they need to sharpen their game – the rich can be hard to please.